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Contract costs, bank loans, and the cross-monitoring hypothesis

Authors
Journal
Journal of Financial Economics
0304-405X
Publisher
Elsevier
Publication Date
Volume
31
Issue
1
Identifiers
DOI: 10.1016/0304-405x(92)90010-u

Abstract

Abstract I examine whether monitoring-related contract costs are reflected in bank loan spreads and find evidence that cross-monitoring by senior and subordinate claimholders is associated with smaller spreads. I also find that loan spreads reflect financial contract costs of controlling borrower behavior toward the assets being financed. These results support the importance of contract costs in firms' financing decisions and provide evidence of the importance of monitoring in bank lending arrangements.

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